A look at the options for retirement planning
There are a variety of retirement planning options available to you. Here are a few of those options:
1. Defined Benefit Pension:
This type of pension benefit is usually completely funded by your employer. From the time you retire until the time you die, a defined benefit pension will provide you with a specific monthly benefit. This monthly benefit is usually based on a percentage of your final salary multiplied by the number of years in which you were employed with the company.
2. Profit-Sharing Plan: This is a plan that your employer funds, usually employee contributions are optional. Once you retire, you will receive your benefit as a lump sum. This type of retirement benefit may depend on the company's contributions. Contributions made by an employee may be tax deductible, if the profit-sharing plan is set up as a 401 (k) plan.
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3. Savings Plan: When you retire, a savings plan provides a lump-sum payment. Employers may contribute to this plan but mainly the employee funds the savings plan. Employee contributions may be tax deductible, if the savings plan is set up as 401 (k).
4. Employee Stock Ownership Plan (ESOP): Under this plan, an employer contributes company stock toward an employee's retirement plan. Employee stock ownership plans may provide a single payment of stock share, upon retirement. Once you reach age 55, and have participated in the plan for ten or more years, you must be given the option of diversifying your ESOP account up to 25 percent of the value. This option will continue until you reach age 60. Once you have reached age 60, you have a one-time option to diversify up to 50 percent of the account.
5.Tax-Sheltered Annuities or 402(b) Plans: These types of plans are offered by tax-exempt and educational organizations for the benefit of their employees. Employees have a choice of a lump sum or a series of monthly payments when they retire. Employee contributions fund these plans and these contributions are tax deductible.
6. Individual Retirement Accounts (IRA): This type of plan is available to any wage earner receiving any salary. Individual contributions completely fund this account. IRA's are commonly held in an account with a brokerage firm, bank, insurance company, mutual fund company, credit union, or savings association. Upon retirement, they provide a lump-sum payment or periodic withdrawals. There are basically two types of IRA's: traditional and Roth. Traditional IRA contributions may be tax deductible and are taxed upon withdrawal. Roth IRA contributions are not tax deductible but withdrawals that are qualified are tax-free.
7. Keogh Plans: This type of plan is designed specifically for people that are self-employed. This plan is completely funded by the wage-earners contributions. Upon retirement, this plan provides either a lump-sum payment or periodic withdrawals. Keogh plan contributions are tax deductible within certain guidelines.
8. Simplified Employee Pensions (SEP): This was designed for small businesses. Upon retirement, they can provide a lump-sum payment or periodic withdrawals, similar to IRA's. But unlike an IRA, the employer mainly funds them. SEP's are commonly held in the same type of accounts that IRA's are held. SEP's that allow employee contributions, may be tax deductible.
9. Savings Incentive Match Plans for Employees, also known as SIMPLE plans: These types of plans were designed for small businesses. They can be set up as IRA's or as 401 (k)s. The funds that are contributed by an employee are on a pre-tax basis, and employers are required to match the contributions. Principal and interest will grow tax deferred in this type of plan.
Keep in mind, withdrawals made before age 59 ½ are subject to a 10 percent penalty, and withdrawals commonly must begin by April 1 of the year after you turn age 70 ½. In most cases, income taxes are due upon withdrawal.
